Q3FY24 Review: Banking & Finance: Softening earnings momentum for PSU banks

21 Mar 2024 , 05:48 PM

Banks reported 1.5% YoY core PPOP and 16% YoY PAT growth in Q3. Loan growth was healthy, but expect it to slowdown. Deposit growth remains sluggish, with CASA ratio declining and LDR inching up. NIM trends were divergent, and analysts of IIFL Securities expect higher compression for ICICI and Kotak ahead. With increase in gross slippage and moderation in recoveries, net slippage ratio inched up QoQ. However, overall AQ remains benign and credit costs low at 40 bps. Analysts of IIFL Securities prefer Private over PSU banks, as the latter’s earnings momentum is slowing and valuations are no longer cheap. Axis, HDFC and IIB are analysts of IIFL Securities top picks. 

Loan growth healthy, but should slow down: 

Loans for IIFL covered banks grew 3-5% QoQ and 15-22% YoY vs. 5% QoQ and 16% YoY for the system. System corporate loan growth picked up to 8%, but still remains tepid across the banks (ex. FB and SBI) given the weak pricing power. Retail and SME growth remains strong at 4- 6% QoQ. Unsecured loan growth has started to slow down sequentially from the elevated levels, but still remains high at 17-60% YoY. HDFC is growing unsecured loans the slowest at 9% CAGR since FY20 vs. 19-33% for the peers, resulting in 6pp decline in the share in overall loan mix to 11% vs. 2-5pp increase for the peers. With the recent increase in the risk-weights, sluggish deposit growth and the RBI’s nudge to lower credit-deposit ratio, analysts of IIFL Securities expect loan growth runrate to slow down to 13-14% in FY25E, but become more broad based. 

No signs of deposit competition ebbing: 

Deposit growth of 2-3% QoQ continues to lag loan growth, except for Axis (5% QoQ led by bulk deposits). In 9MFY24, deposit mobilisation was better for Private vs. PSU banks. HDFC’s CASA growth is better than the peers, in-line for overall deposits and weaker for retail. In Q3, CASA ratio declined 10-65 bps QoQ across the banks, save for improvement in HDFC and BOB. Credit-deposit ratio continues to inch-up and is >85% for all the Private banks. Deficit system liquidity and sluggish interbank market have kept the overnight call rates above the policy rate. With the system CD ratio at an all-time high, the deposit competition has aggravated and is reflected in: (1) Time deposit interest rate hike of 10-100 bps in last nine months (mainly in short-tenure and bulk deposits recently). (2) Select mid-sized Private banks’ peak savings ROI now higher than larger banks’ peak TD rates. (3) 18% YoY increase in the banks’ certificate of deposit (CD) issuances as the banks tap short-duration funds. (4) Increase in the bond issuances. (5) Drawdown of excess liquidity (LCR down 2-14 pp QoQ). 

Divergent NIM outcomes to continue: 

Asset yield expanded 5-15 bps QoQ on the back of drawdown in excess liquidity and faster growth in unsecured loans. Banks took rate hikes on personal loan and NBFC exposure following the increase in risk-weights. Funding cost rose 5- 20 bps QoQ as deposits continue to reprice with a lag, and resulted in divergent margins. While NIMs are declining since last few quarters, they are still 10-50 bps ahead of Q4FY22 level. Basis analysts of IIFL Securities analysis of the potential residual loan and deposit re-pricing, analysts of IIFL Securities expect spreads to decline further by 5-35 bps for select banks. ICICI and Kotak should see higher NIM compression; lower for Axis and Federal; stable for SBI and HDFC; and improvement for RBL, BOB and IIB. 

Unsecured loan slippages inch-up, credit costs remain low: 

Led by loan waiver in northern India and floods in TN, MFI slippages have inched up 10-300 bps. Delinquencies also rose for credit card and KCC (seasonal) loans. With increase in gross slippage and moderation in recoveries, net slippage ratio inched up QoQ (save for HDFC, Axis and BOB). However, overall AQ still remains benign with stressed loan ratio improving 20 bps QoQ. Credit costs remain low at 40 bps (flat QoQ and 83 bps in Q3FY23), mainly due to reversal in standard provisions for the PSU banks. Analysts of IIFL Securities forecast credit costs to increase 20- 40 bps over FY25-26E as the asset quality environment normalises. 

Mid-teens PAT growth in Q3; dispersed earnings revisions post the results: 

Banks under analysts of IIFL Securities coverage delivered 2% QoQ and 16% YoY PAT growth. Consensus earnings revision was dispersed – EPS upgraded by 1-2% for FB, RBL and HDFC; flattish for Kotak, SBI and IIB; and cuts of 1-2% for Axis, ICICI and BOB.